Download economic analysis of public goods and their influence in the region

Audit financiar, XIV, No. 4(136)/2016, 444-454
Richard POSPÍŠIL
ISSN: 1583-5812; ISSN on-line: 1844-8801
The macroeconomic
analysis of
public goods
and their
influence in
the region of
Czech Republic
Richard POSPÍŠIL,
Department of Applied Economics, Faculty of Arts,
Palacký University of Olomouc, Czech Republic,
e-mail: [email protected]
Abstract
In the region of Czech Republic, the provision of public
goods is one of the State’s most important activities with
society-wide impacts. Therefore, the debate on the
structure and scope of public budgets is legitimate and
ongoing on a society-wide scale. Mainstream fiscal
theory considers public goods to be one of the failures of
market equilibrium, classifying them as being close to
positive externalities. In this case, the activity of the
State brings benefits to other entities that are not
involved in this activity and do not even directly pay for
it. The main characteristics of these goods include
irreducibility of their amount in society, non-excludability
and non-rivalry. There are a number of goods between
purely private and purely public goods which, to varying
extents, exhibit both elements. Today, the majority of
goods provided by the public sector are of such a
nature; as a result, the form of allocation and the
subsequent redistribution of resources are crucial when
analysing public goods. The present paper analyses
public goods in the Czech Republic from an economic
and legal perspective using Cost-Benefit Analysis,
including their efficiency and society-wide benefits.
Keywords: Public goods, public economics, benefit,
efficiency, free-rider problem, Cost Benefit Analysis,
Czech Republic.
JEL Classification: E61, E62.
To cite this article:
Pospíšil, R. (2016), The macroeconomic analysis of public
goods and their influence in the region of Czech Republic, Audit
Financiar, vol. XIV, no. 4(136)/2016, pp. 444-454, DOI:
10.20869/AUDITF/2016/136/444.
Permanent link to this document:
http://dx.doi.org/10.20869/AUDITF/2016/136/444.
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The macroeconomic analysis of public goods and their influence
in the region of Czech Republic
Introduction
Until recently, the concept of public goods and public
services had no explicit definition in the positive law
of the Czech Republic. The Administrative Procedure
Act merely referred to the concept of public use
which will be mentioned later. This act, as well as
other sources (Hendrych, 2009), only allowed us to
indirectly infer legal and economic definition of public
(collective) goods, or the “collective consumption
goods”, in the Czech Republic. This changed on 1
January 2014, the effective date of the Civil Code.
However, it only laconically provides that a thing
intended for general use is a public thing (i.e. a
public good). It is therefore clear that in terms of
content and purpose, the definition does not capture
the economic essence of public goods.
One of the first definitions of collective goods is
mentioned in the neoclassical theory of equilibrium
and the Pareto optimality (Pareto and Schwier,
1927), which primarily addresses optimal allocation
of resources and their subsequent redistribution to
finance collective goods. The post-war period saw
the publication of well-known works by Wicksell
(1964) and Lindhal (1964), who considered the
“integral approach” for all functions of the public
sector (i.e. the allocation, distribution, redistribution,
stimulation, control and emission functions), that is,
the entire chain of activities from taxation to the
subsequent use of a public good or service
(Mikušová-Meriþková and Stejskal, 2014). Also
known in the Czech Republic, the pioneering work of
Musgrave focusing on issues of Walrasian general
equilibrium and general optimum (Musgrave, 1959;
Musgrave, 1994) represents another impulse for the
development of the theory of collective consumption
goods. The theory of collective decision-making on
tax allocation and subsequent redistribution was also
dealt with by Bowen (1943). All of these, and many
other papers, resulted in a solution to the issue of
collective decision-making known as the “public
choice theory” formulated by Arrow (1963),
Buchanan, Tullock and others (Buchanan and
Tullock, 1962).
In most cases, these theories are based on marketoriented and liberal economic thinking which does
not favour State intervention in the economy.
However, they admit the need for such interventions
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in the form of the allocation of public funds and
financing of public goods which are specific in terms
of their purpose, creation, financing and use, and
thus cannot be produced in a purely market
environment. The free market fails in the case of
public goods; therefore, the State has assumed
responsibility to supply these goods throughout the
society. Redistribution, being the result of a political
choice, in most cases results in a greater or lesser
degree of inefficiency which is justified by the need to
address the impacts of income inequality, the free
rider problem, or by political reasons in the social
area.
The reasons for this inefficiency include the issue
concerning the evaluation of ex-post benefit for the
consumers of collective goods or of their value. In
addition, the basic concept of neoclassical
economics is often in contradiction with the observed
reality around us (Mikušová-Meriþková and Stejskal,
2014). The conclusions of neoclassical economic
theories do not necessarily have universal validity
given that they disregard the behavioural elements of
the analysed economic problems (Mises, 2006).
Another author who has previously dealt with the
concept of public goods was Samuelson in his book
The Pure Theory of Public Expenditure (1954).
Public goods bring common benefit in that the
consumption of that good by any individual does not
reduce the consumption by others. It is this quality
that distinguishes public goods from private ones.
Later, Samuelson further specified the term in his
economics textbooks. It is a commodity whose
benefits may be provided to all people without it
leading to costs higher than those associated with
the provision to one person. The benefits of these
goods are indivisible and individuals cannot be
excluded from their use (Samuelson, 2010).
Samuelson argued that the benefits of public goods
are indivisibly spread across all members of society
regardless of whether or not particular individuals
wish to buy them. Samuelson’s theory named three
economic functions of the State: promoting
efficiency, fairness and stability. Although
Samuelson’s classification of goods has been
criticized many times and several other
classifications were created later, all are based on
his original characteristics; this definition was also
adopted by the Macmillan Dictionary of Modern
Economics (Pearce, 1995). Public goods are defined
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Richard POSPÍŠIL
primarily by the nature of their consumption rather
than by how they are produced or financed. The fact
that these goods are consumed by all consumers at
the same time and in aggregate allows the
conclusion that their consumption by one consumer
does not reduce the consumption by others and
therefore an extra unit of consumption involves zero
(or near-zero) marginal cost.
This paper aims to analyse the concept of public
goods from an economic and legal perspective and
to quantify and define the function of public goods in,
and their benefits for, the society. In order to achieve
this aim, we have employed the CBA – Cost Benefit
Analysis, as the most suitable input-output method
for public budgets and public goods and their
temporal discounting.
1. Benefit of public goods and its
function in society
The above characteristics clearly show that it is
impossible to force consumers of purely public goods
to express their preferences through price because
the market price of these goods does not exist and
that there is non-rival consumption among
consumers. Therefore, there is a real possibility of
the “congestion effect” as the growing number of
fiscal unit members leads to exceeding the capacity
of the facility providing these goods and
subsequently results in a sharp decline in the quality
of consumption. This is due to the fact that if a good
is provided gratuitously and its market price is neither
known nor required, its consumption is likely to be
higher than the effective consumption level, as
consumers will require the good up to the point of
zero marginal benefit and will disregard the real, nonzero cost of production.
This concept of public goods, now widely accepted,
was complemented by Stiglitz (1986) to include the
free rider problem. Stiglitz argued that a free rider is
an individual who consumes and uses a public good
without paying for it. As a result, he benefits from
those individuals who are willing to contribute to the
public goods (e.g. indirectly through the tax system).
Free riders cannot be excluded from consumption.
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The cost of exclusion from consumption would be
disproportionate. Other essential features and
characteristics of public goods include zero or very
low marginal cost of providing additional units of the
public good. For example, the cost of flood protection
measures will not increase even if the number of
residents in the flood area increases by one.
According to Stiglitz (1986), the second key feature
is that it is essentially very difficult, or even
impossible, to exclude individuals from the use of a
public good. Therefore, the price system cannot act
as a tool to “allocate” (provide) goods to consumers
which, considering a competitive market, leads to a
Pareto optimal quantity of goods because the good
can also be consumed by an individual who has not
paid for it. There is no reason why individuals should
uncover their true willingness to pay. Such an
individual can rely on benefiting from the
consumption of those who are willing to pay. The
provision and subsequent use of this good is
therefore characteristic for being non-excludable.
Non-excludability is a traditionally indicated
characteristic of public goods. Yet, today it can be
technically defined (particular individuals can be
excluded from consumption). These changes often
result from changing technologies. For example,
the development of cable television allows efficient
and selective collection of fees for watching certain
programmes, or computers significantly reduced
the cost of collecting certain fees so that it is now
possible to charge higher fees during rush hour or
tolls at different rates, different times and for
different cars, etc. (Stiglitz, 1997).
In this case, it is advisable to analyse whether or
not the exclusion from consumption through prices
is desirable or useful if the exclusion of an
additional consumers does not reduce the overall
benefit from the consumption of the good. In the
case of non-rival consumption with zero marginal
cost of consumption of an additional unit of the
good, it is Pareto optimal to enable the
consumption to all consumers whose benefit is
greater than zero. In this case, exclusion is
technically possible, but causes the loss of benefit
as shown in Figure 1.
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The macroeconomic analysis of public goods and their influence
in the region of Czech Republic
Figure 1: A good where exclusion is technically possible, but not desirable
Source: Malý,1998
It is technically possible to collect toll to cross a bridge.
However, if the bridge has sufficient capacity (demand
D1), it is not desirable to restrict the number of
passages. If, nevertheless, toll p is introduced, the area
under the demand curve D1, delimited on the x-axis by
the interval [Qe,Qm], will symbolize the loss of benefit.
Demand exceeding the capacity of the bridge will lead to
negative benefits, the benefit of the consumers will
decrease (congestion effect, resulting in e.g. extended
travel time). At that moment rival consumption occurs
and market price could possibly regulate the number of
passages (Malý, 1998).
Measurement and evaluation of the benefit in the
provision of public services is complicated mainly due to
the quantification of outputs and outcomes. Measuring the
efficiency of public services is particularly challenging
because they are often provided without direct payment
by consumers or at a subsidized price. Therefore,
measuring the efficiency and performance of the public
sector has always tended to marginalize the outputs and
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results and focus only on the size of the inputs. However,
this approach is now obsolete and today we can use
multiple ways to measure output and efficiency in the
public sector (Benþo and Kuvíková, 2011).
Measuring the efficiency of providing public goods and
services employs a range of methods from a wide range
of input-output methods. The CBA is a measurement
method which is probably the most suitable for the public
sector and public projects. This method is based on a
comparison of all considered costs and benefits of a given
project, regardless of their addressee. Therefore, it is also
referred to as the social form of cost-benefit analysis, with
inputs and outputs being measured in units of value.
Benefits are understood as any increase in utility, while,
conversely, costs are understood as its decrease. The
method can also be defined as a set of practical methods
of optimal choice in the field of public economics
respecting the criteria of maximum net profitability, all of
the considered costs and benefits being expressed in
monetary terms, whether directly or indirectly.
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Richard POSPÍŠIL
Identifying and measuring the total cost of a certain public
programme (good) is not easy because measuring is
necessary at several levels and in different ways.
Likewise, it is relatively difficult to identify and quantify
their benefits (utility) which follows from their diversity and,
in some cases, from difficult measurability. Benefits
represent the sum of satisfaction of individuals or groups
of individuals which are provided by a particular public
programme (good). Applying the CBA method is therefore
dependent on the ability to define the overall costs and
benefits and on the possibility to assess them, preferably
in monetary terms for easier comparison.
As individual costs and benefits do not arise at the same
time, but are usually spread over several years, they
must be discounted with regard to the time factor. The
later a benefit is available, the smaller the discounted
factor. The present value will increase during the year to
the future value depending on the interest rate:
FV = PV * (1 + r),
(1)
Bt – benefit in period t;
Ct – cost in period t;
r – interest rate.
The above equation implies that the public project
(good) is economically beneficial if the discounted value
of the benefits exceeds the discounted cost. The impact
of the amount of the provided public good q per one
economic entity can be expressed as CV (compensating
variation), which expresses unit welfare, change of
benefit for one member of society, or the quantification
of flows that would occur if the supply or demand of one
member of society changes while maintaining the
current volume of benefit.
The change in total welfare can then be expressed as
follows:
ǻW(ǻq) = w1CV 1 (ǻq) + w2CV 2 (q) + ... + wnCV n (ǻq),
(4)
where:
CVe – compensating variation induced by changes in the
availability of a particular good q belonging to
entity e,
where:
PV – present value,
We – weighting of individual e-th CV impacting the
welfare function.
FV – future value,
r – interest rate.
In the n-th year, the FV is expressed as:
FV = PV * (1 + r)n,
(2)
where:
n – number of years a public programme (good)
provides a benefit.
The provision of public goods is one of the tools to
multiply government spending. This case concerns an
increase in GDP due to an increase in government
provision of public goods by one koruna. The
government’s initial purchase of public goods sets in
motion a chain of costs, so that one additional koruna in
government spending will have the same effect as an
additional koruna in investment.
If people consume r from each additional koruna, the
overall multiplicative chain will look as follows:
Subsequently, we need to compare the benefit of the
already defined and quantified costs and benefits:
1 + r + r2 + … = 1/1–r = 1/1–MPC = 1/1–MPS
(5)
where:
(3)
where:
t – time period,
T – time horizon, where a public project (good)
completes its economic life,
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MPC – marginal propensity to consume
MPS – marginal propensity to savings
However, the multiplier works both ways. If the
government decreases the provision of public goods,
then there will be a decline in GDP equivalent to the
multiplier effect, maintaining constant taxes and other
influences (ceteris paribus). This should be borne in
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The macroeconomic analysis of public goods and their influence
in the region of Czech Republic
mind when applying restrictive fiscal policy and reducing
spending on public goods.
There are many important aspects other than just the
zero marginal cost of consumption. These include, for
example, the fear of high income inequality. Limiting
consumption is then considered to be socially
undesirable, as it would be impossible for less well-off
individuals to afford the consumption. For this reason,
goods regarded as public include health care or rentregulated housing, even if the marginal cost of providing
such a good is definitely neither zero nor negligible. With
regard to the foregoing, Hirshmann (1981) noted that
changes in the consumption of public goods also occur
due to changes in consumer tastes. He demonstrated
that in history, there have been periodic variations
favouring one or the other way of providing goods –
privately or publicly. When consumers find that private
goods do not fully satisfy them, they start focusing more
on public goods. However, their expectations often
remain unsatisfied even in the public sector and, as a
result, consumers again return to private goods after
some time.
The concept of public goods was defined similarly by
Hyman (1990). He was more concerned with the
relationship between the non-excludability and nonrivalry. Non-rivalry is especially a characteristic of pure
public goods where quality is indivisible. Consumption
by one user does not diminish the possibility of another
user to consume the good, i.e. it is impossible to
physically reduce the good. At the same time, Bénard
(1990) distinguished two characteristics of a good: the
manner of its allocation and the manner of its
consumption. According to the institutional criteria,
Bénard (1990) classified goods as market goods,
impurely market goods and non-market goods. The
criterion to distinguish between these types of goods is
the presence and characteristics of the market price as
the allocation mechanism. The price of market goods
(which are dominant in mixed economies) is the result of
interaction between supply and demand. In the case of
institutional classification, a political decision on how to
provide the goods is important. In principle, it is possible
to decide to provide any good in a non-market way or
directly or indirectly intervene in the price and availability
of the good. These government interventions may aim to
promote as well as discourage consumption. In other
words, it is about how the goods reach the consumer,
which can be set up by methods other than pricing tools,
such as political decisions or legislation.
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2. Economic criterion to classify
goods
The existence of public goods is one of the signs of
market failure. The market system, i.e. the competitive
environment, is characteristic for legal or natural people
deciding on production, consumption and the allocation
of private funds. If the private sector is unable to provide
certain services because it is impossible to make a
profit, those services must be provided by the State and
territorial self-governments (i.e. public administration).
This is referred to as “allocation activity”. Providing these
public services (goods), which we call pure or mixed,
falls under the responsibility of public authorities at the
national, regional and local levels. The range of
competencies is established by law. It includes the
actual public administration, education, healthcare,
social services, social housing, justice, police, military,
culture and heritage conservation, physical education
and sport, science and research, public transport,
communications, information systems and media, water
management – including the regulation of water flows
and other activities – environmental protection, and
possibly also energy management (Peková, Pilný and
Jetmar, 2008).
The economic criterion considers the way goods are
consumed as well as what happens to the benefits
provided by the consumption of the goods. It classifies
goods into pure public (more specifically, pure
collective), mixed and private. McKenzie and Tullock
(1978) believed that public goods are those where the
benefits provided by the consumption of such goods are
shared by a particular group (such as the inhabitants of
a country, region, city, etc.) as a whole when the good is
provided to or consumed by one person. Examples often
include goods such as national defence and efficient
public administration at the national level and the
traditionally mentioned lighthouses, street lighting or
controlled intersections at the local level. Although the
classification of criteria to economic and institutional
ones is clear and logical, its schema presents a certain
problem. Practice, as well as economic papers, often do
not distinguish between “non-market” and “public”; more
specifically, the term “non-market goods” is generally not
used.
The above has been developed and refined by a note
made by Malý (1998), previously presented by Sandler
(1977), which concerned the fact that only few public
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goods are purely public, i.e. those that simultaneously
and cumulatively meet the conditions of non-rivalry and
non-excludability. For example, if the army is
concentrated in the north, people from the south may not
be as protected as those in the north. Even the oftenmentioned lighthouses were typically operated by the
private sector in the past. Therefore, it seems that
Samuelson’s pure public goods play rather an important
role as one of the poles between which there are a large
number of real, existing mixed goods.
So the question becomes how to classify these
observable goods. One of the many possible
approaches is to take into account the characteristics of
public goods. The classification then takes the following
form as shown in Table 1.
goods into pure public and mixed ones. The
consumption of pure public goods is automatic by their
nature, as they are goods of pure collective consumption
(e.g. the army). Their characteristics include, in
particular, the impossibility to exactly determine the
share of an individual in the consumption of a particular
public good, as well as to prevent an individual from
consuming the good (that is, an individual cannot be
excluded from consumption). This characteristic is
referred to as the indivisibility of consumption, which
leads to non-excludability and is associated with nonrivalry (i.e. non-competitiveness) among consumers or
users of a public good.
Pure public goods are symbolized by category D.
Category A represents pure private goods. Goods falling
under category B exhibit rivalry in consumption, but
exclusion is difficult or impossible. Freely accessible
resources are a good example. Contrary cases are
illustrated by category C. These goods are non-rival,
although exclusion from consumption is possible. If
capacity has not been depleted, the passage of another
vehicle over a bridge does not diminish the benefit of the
others; however, exclusion can be done relatively easily
by introducing toll. The same applies e.g. to theatre
performances, pools etc. In these cases, market
mechanism can be applied, although it can lead to
inefficiency. However, that does not mean that in all
these cases market failure must be remedied only by
state intervention. The efficient provision of these goods
can also be addressed by a private initiative. Developed
by Buchanan (1965), the theory of clubs serves as the
best example: the theory determines the conditions for
the optimal production of category C goods where they
are produced within a group of consumers.
The quality of a public good is indivisible. Consumption
of a good or service by one user does not prevent other
users from the possibility of consuming it. However,
excessive consumption of the good may lead to a
decrease in its quality for all. An example is the
congestion of a road (hence the congestion effect)
resulting in slower traffic and other related aspects.
It is impossible to measure the consumption of a pure
public good and determine the share of individual
consumption, i.e. determine the amount of a “user fee”
charged for the good or service. At the same time, the
marginal cost of consumption of such a good is zero, or
near zero. Stiglitz therefore argued that it is ineffective,
as well as socially undesirable, to reduce the
consumption of such a good. An example is the
introduction of toll to cross a bridge. In this case, it is
technically possible to introduce a toll; however,
marginal cost (up to the maximum bridge capacity) of an
additional car to cross the bridge is zero. Their
introduction would only lead to a reduction in the overall
social benefit, as part of the drivers would bypass the
bridge and congest local roads.
Identically to pure public goods, mixed goods have the
nature of collective consumption goods. The benefit from
the consumption of such a good is individual. Unlike in
the case of pure public goods, it is mostly possible to
determine the exact share of a consumer in its
consumption. It is therefore possible to determine a kind
of “user fee” for consumption. Again, the term “free rider”
comes into play, i.e. someone who consumes and uses
a service or good without paying. However, quality (or
standard) is indivisible. For example, the more pupils in
a class, the lower the quality of education (compared to
a class with fewer pupils).
According to the manner of distribution and redistribution
of public goods, we can, in principle, classify public
Based on the manner of their consumption, mixed goods
can also be divided into optional and mandatory
Table 1. Schematic classification of goods
Consumption
rival
non-rival
excludable
non-excludable
A
C
B
D
Source: Author’s compilation, 2016
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consumption. In the case of optional consumption,
consumers may decide whether or not they want to use
the service; therefore, they have a choice. For example,
they may choose the preferred medical facility or school,
whether they will go by public transport or which social
service they will use. This is different in the case of
mandatory services. Here, the State (i.e. public
administration) lays down certain rules, thus determining
the manner in which consumers are to use a particular
good. An example is the system of basic education
which has a mandatory duration, manner, etc.
3. General and special
use of goods
As already mentioned above, the legal regulation
governing public goods was introduced only on 1
January 2014 in the new Civil Code. Previously, the
Administrative Procedure Act only provided for “public
use”. The issue of public use relates to both public and
private law and represents one of the borderline areas
between the two. Public use is understood as the use of
generally accessible material goods which corresponds
to their intended purpose by an unlimited number of
users.
Depending on the creation of the possibility of public
use, we can distinguish two types of public use: general
use and special use. General and special use are of
public nature – the specific use of a material good
intended for public use is not affected by the expression
of the will of the owner (Hendrych, 2009). The user must
also use the good in a way that does not preclude the
use by other (even potential) users. Use that might limit
the other users to an extent other than usual should be
regarded as special use, or as prohibited conduct.
The legal possibility of general use arises directly from
the law. Its content can be determined positively, or it
may follow from various public-law restrictions relating to
the protection of the interests, which have the nature of
special interests in terms of the use itself. Alternatively,
general use may not be specified by a legal regulation at
all. In this case, one can conclude that such use must be
usual given the intended purpose determined by the
nature of each particular material good. For example,
road users are, inter alia, obliged to adapt their
behaviour to the construction and technical condition of
the road. They are obliged to behave considerately and
in a disciplined manner not to put the life, health or
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property of other persons (i.e. the other road users) at
risk.
The creation of the legal possibility of general use for a
particular user is not connected to any expression of the
will of any public administration executor, i.e. no
administrative action.
In contrast, the permission of special use for a particular
user is created based on an administrative act issued by
the competent administrative authority and is always
created for the intended user – the act’s addressee. The
content of special use mainly follows from the said
administrative act which usually has the nature of a
permit. It defines the manner and duration of the special
use; the law may also provide for modes – conditions of
special use.
Public use concerns material goods – both natural
goods and things created through human activity. They
may include water, roads, public spaces, landscape,
forest, some types of energy, radio spectrum, etc. For
example, public places involve squares, streets,
marketplaces, pavements, public greenery, parks and
other areas accessible to everyone without restriction,
i.e. intended for general use, and regardless of the
ownership of the area. The definition of a public space
(as can be seen) consists of a demonstrative definition
of public space under the condition of “accessibility to all
without restriction”. The imperative requiring a judicial
act to be determinate demands that a generally binding
ordinance determine such a space as accurately as
possible, i.e. so that its location is specific enough and
does not allow multiple interpretations. Public space is
thus defined, regardless of the ownership of the
immovable property where the public space is located.
The designation of private property as a public space by
a generally binding municipal ordinance cannot therefore
be considered as equivalent to expropriation, or forced
restriction of property right within the meaning of the
Charter of Fundamental Rights and Freedoms.
Public use can therefore also apply to material goods
which are privately owned. These may include parts of
public spaces, such as the right to go through a
passageway without the obligation of creating an
easement. In these cases, public use may be restricted
in some way (especially in terms of time – the public use
of passageways may not be possible at night, etc.). In
the case of certain material goods, the owner of such
goods is completely irrelevant. The general use of
forests applies both to State- or municipality-owned
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Richard POSPÍŠIL
forests, as well as to private forests (Hendrych, 2009).
For example, everyone has the right to enter into a
forest at their own risk, pick berries and collect dry twigs
lying on the ground for their own use. In doing so, they
are obliged not to damage the forest, interfere with the
forest environment and to follow the instructions of the
owner or lessee of the forest and his employees.
Applicable law also regulates access to the countryside.
Everyone has the right to free passage across land in
the ownership or lease of the State, municipality or
another legal entity as long as they do not cause
damage to property or health of another person and do
not interfere with the rights to the protection of
personality rights or neighbours’ rights. In the exercise of
such a right, they must comply with the laws and respect
the legitimate interests of the owner or lessee of the
land. Arable land, meadows and pastures are excluded
from this at a time when it may cause damage to the
land cover or soil, or during pasture.
4. Financing of public goods
Historical research used public goods as an example to
illustrate their existence. Lighthouses save lives and
cargo, so it is most effective to provide for lighthouses
gratuitously, because warning one ship of a danger costs
the same as warning another one (Samuelson, 2010).
When Coase (1974), a British economist, described the
history of lighthouses in England and Wales and found
out that they were operated by private entities, the original
view of lighthouses as a public good somewhat changed.
Coase (1974) found that English lighthouses were
operated under licenses granted by the king, and were
financed by government “light fees” imposed on ships that
were using ports in the vicinity. Coase (1974) concluded
that, contrary to the view of many economists, the
lighthouse service may also be provided by a private
entity. In this case, we can see that if the provision of a
public good can be associated with another good or
service and if the government grants the right to collect
fees to private entities, there may be an alternative way of
financing the public good (Ochrana, 2011).
At present, public goods are overwhelmingly financed
from public funds and their independent existence is
predicated on the existence of public finances and the
State’s ability to allocate resources. This does not mean,
however, that they are financed exclusively by these
funds. Another way of providing for public goods is
452
through non-profit organizations that are established for
this purpose by the State or local self-governing units,
i.e. municipalities or regions. This funding is used in the
case of a non-competitive environment where we cannot
select a supplier, if the monopoly of a private enterprise
is undesirable, or in the case of essential services,
particularly preferred public goods for which it is
necessary to ensure their absolute reliability (e.g.
education).
In the case of public goods, essential aspects also
include the public administration authority as well as the
type of public funds used to finance the particular good.
The State budget (through the Ministry of Transport) is
used to finance, e.g., the construction and repair of
motorways; by contrast, the construction and repair of
1st-class roads are financed by higher territorial, selfgoverning units (regions). The same applies to the
financing of public universities, secondary schools and
primary schools. Public universities are financed from
the state budget through the Ministry of Education,
Youth and Sports, secondary schools are financed from
the budgets of higher territorial self-governing units and
primary schools from the budgets of local territorial selfgoverning units (municipalities).
This financing method also applies in cases where it is
impossible to find (e.g. in a selection procedure) a
private legal or natural person willing to provide these
public goods to citizens (Pospíšil, 2013).
Public goods are also provided through State and
municipal enterprises, especially when providing goods
difficult to be classified under market goods – the “halfmarket goods”, where the market fails in their provision
(an example being the generation of heat or maintenance
of greenery) (Strecková, 1997). Another way of financing
includes a joint venture, e.g., between two municipalities
(micro-regions, voluntary associations of municipalities),
or a joint venture between a municipality and the private
sector, funding through contracts awarded to the private
sector in a competitive environment based on a selection
procedure, or funding through the civil sector represented
by publicly beneficial organizations.
When providing for various public goods for citizens, the
individual levels of public administration establish
organizations, which primarily operate on a non-profit
basis – these include subsidized organizations,
charitable organizations and organisational components
of the State, municipalities and regions. The provision of
public goods becomes decentralised as the State
AUDIT FINANCIAR, year XIV
The macroeconomic analysis of public goods and their influence
in the region of Czech Republic
delegates its responsibility for the provision of certain
public goods to individual levels of territorial selfgovernment.
Conclusion
Public goods are considered a market failure and, in
terms of the types of market failures, they represent the
most common type of market failure throughout the
economy. They have an undeniable society-wide impact
and the participation and role of the State or its
components as the main provider of public goods has
been permanent and undeniable since the 1930s.
Before then, public spending was mainly channelled to
defence and foreign policy, but since the crisis of the
1930s the State’s activities have refocused primarily to
the public sector, the provision of public goods and
services and to the social area. This is also reflected in
the degree of redistribution of allocated resources, which
was increasing throughout the 20th century.
When allocating resources and subsequently providing
public goods, society, represented by the government,
must decide:
x What types of public goods will be provided by each
level of public administration;
x What quantities of a particular public good will be
provided, or the total population for which a particular
public good will be provided to reach “economies of
cost sharing” and minimize the loss of the effect of
centrally provided public goods;
x What standard of public goods can be provided
given the limited amount of public funds.
Mixed goods – meaning those that are irreducible and
excludable or reducible and non-excludable – may be and
are of a divisible nature (in some cases) and of an
indivisible nature (in other cases). Where it is possible to
value (quantify) the consumption of a mixed good, it is
also possible to determine a user fee per unit of consumption of such a good. Their consumption is then either:
x Optional – individuals can independently decide
whether or not they will use the public good (public
transport). These types of goods are provided to
citizens for a user fee which is modified by price.
This is because mixed goods do not pass through
the market. They are not provided for profit and
therefore they are provided to users for a user fee
calculated on a non-profit basis.
x Mandated by the State (the law) – this primarily
applies to preferred goods such as basic education.
Their financing involves public budget funds. These
types of goods are primarily funded from taxes while
using redistributive relations within the system of
public budgets. Therefore, it is sometimes referred to
as redistribution services or redistributed (public or
mixed) goods.
The main defining feature of public (and mixed) goods is
the nature of their consumption rather than the nature of
their production or financing. The consumption of “pure
public goods” is fully irreducible among individual
consumers making it difficult to exclude anyone from
consumption through the price mechanism. The fact that
these goods are consumed by all consumers at the
same time and in aggregate allows the conclusion that
the consumption of one consumer does not reduce the
consumption of others. The marginal cost of producing
an additional unit of the public good and its use is
therefore zero. This characteristic logically leads to a
lack of interest of the private sector in the production of
such goods as well as the efforts of consumers to
participate in the allocation of funds for their financing.
Acknowledgement
Work on this article was supported by the grant from
Philosophical faculty of Palacký University,
IGA_FF_2015_014, “Continuities and Discontinuities of
Economy and Management in the Past and Present”.
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DATA
1. Charter of Fundamental Rights and Freedoms,
Article 11(4)
2. Act no. 114/1992 Sb., on nature and landscape
protection, Section 63(2) to (4)
3. Act no. 289/1995 Sb., the Forest Act, Section 19(1)
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